Project Cost Management
Project cost management is used throughout the project management process to strike a balance between unlimited wants and limited resources. When developing a project plan, everyone wants the project's result to solve every problem, do every task, etc. Then they start assigning costs to each result that they want from the project, and things get real again. (The sole exception to project cost management's discipline is war!)
One method of project cost management follows this scenario explicitly. In order to avoid inhibiting creativity and discussion during the planning of a project, the planning team is not told how much money they can spend or what things cost. They just come up with a plan and then a budget is revealed. Then compromises are made. New ways of accomplishing the same result at less cost are devised. The final project plan fits within the budget, somehow. This method is often used in developing creative projects such as advertising campaigns or rock star concert tours.
Another method provides a budget along with the general mandate of the project, and project cost management is applied as the plan is developed. This method is more commonly used in business and government activities (other than war). As the scope, activities, and quality of the project take shape, each incremental increase in one of these factors is evaluated on the basis of whether it can be afforded.
Risk assessment is part of project cost management. In construction projects, particularly, most risks are of a financial nature. It is assumed that some things will go wrong: there will be delays, mistakes, strikes, etc. Risk assessment projects the probability of an adverse event occurring, multiples it by the cost that will be incurred if the event occurs, and assigns the resulting cost to the project's budget. Risk assessment helps pinpoint the critical risks in a project plan. Often, the critical risks are not those whose cost is highest if they occur, but those with the highest probabilities of occurring.
With risks identified, it is possible to identify ways to mitigate each critical risk, and the financial cost of mitigation. Insurance against strikes, for example, costs a known amount of money. Project cost management balances calculated risks against the costs of mitigating them to achieve optimal costs.
Cost estimates are part of the project cost management process. Having identified what materials and tasks are needed for the project, estimators gather prices from various suppliers to come up with cost estimates. A degree of uncertainty is inherent in any cost that you have not yet actually incurred; for example, the cost of concrete may rise or fall between the time you estimate it and the time you actually order it. Futures contracts, hedges, and other methods are used to reduce the risk of cost overruns.